What IP Assets Should Startups Value First?

IP is one of the most valuable items on an early stage company’s balance sheet when it has very little else. What IP assets should startups value first? is a question that founders and investors must ask before they invest, enter into partnerships or a deal is done, because the answer is often a key factor in whether or not they leverage their investment. A clear startup IP strategy will help your young company not spend its limited legal budget on defending assets that have limited value to the company, and not forget the assets that have the greatest value to the company’s future buyers or licensors. Being able to understand the relationship between startup asset valuation and patent asset value is something that is useful and in-demand for those that are building a career in startup operations, venture finance, or IP law. This article covers the process, provides some examples, and explains what startup IP assets warrant careful consideration first and foremost, and why, to ensure that precious early-stage time and money is invested in protecting what’s important. 

What IP Assets Should Startups Value First When Building a Startup IP Strategy?

IP normally comes in four main categories – patents, trademarks, copyrights and trade secrets. Patents are typically the most expensive and time-consuming type of protection, taking two to four years to obtain, and are almost always the most complicated to draft so as to be valid in the event the patent is attacked. Brand names, logos or slogans are protected as trademark rights and can be registered relatively quickly and easily but if not used and enforced, they will lose their value. While copyright is technically automatic when a creative work is created, the process of formally registering the copyright remains important in the enforcement process and copyrights are granted for original creative works, including software code, written materials and design assets. Trade secrets, on the other hand, are confidential business information, formulas, algorithms, customer information, or business processes that are not registered, but instead safeguarded through active measures, including non-disclosure agreements and limiting access. In order to answer the question “What IP Assets Should Startups Value First?,” it helps to understand this landscape, since each category will need a different level of investment of time, money and legal effort; and mixing up one with another will likely result in founders protecting the wrong thing at the wrong time.

The prioritization question greatly varies by startup industry, stage, and company. Most biotechnology companies based on one novel compound will focus primarily on Patent Asset Value, as the patent is at the very core of the business, the fundraising narrative, and the exit. A consumer app, however, might be more commercially significant in the short term by virtue of the fact that it is well remembered, and recognized as a brand that might be infringed, than by any patent filing, and not withstanding that there may not be sufficient consumers to make trade secret information truly valuable, especially in the initial years when the underlying technology is yet to be proven and a large user base has not yet been established. The reality is that all founding teams must make this decision for themselves, and that the answer to “What IP Assets Should Startups Value First?” will vary from one type of business to another, even if they’ve raised the same amount of money at the same stage. That’s why a good Startup IP Strategy begins with a straightforward exercise: an inventory of all the intellectual property a startup has or is likely to have, and prioritizing each by how directly it contributes to revenue, defense, or investor interest. One of the more frequent first-year errors that founders make is to miss this exercise; some do this because IP is perceived as something to put off until later in the process, rather than something to plan around from the outset.

How Does Patent Asset Value Fit Into Startup Asset Valuation?

The blood-testing company Theranos provides a cautionary tale about taking for granted the value of patents. The company once had dozens of hundred patents relating to diagnostic testing technology and investors were told that this portfolios were worth billions of dollars in private value, and that it offered huge defensible value. Subsequent examination by others, such as investigative reporting and regulatory, showed that many of the patents were based on ideas that have not been reduced to an actual, reliable product and that the underlying technology failed to actually function as claimed. One of the key lessons in Startup Asset Valuation is that a patent doesn’t mean its worth—Patent Asset Value should always be based on whether the underlying invention is actually useful and can be produced or supplied at scale, and not just how many patents show up in a portfolio summary.

Instead, Tesla’s initial patent play provides a more positive example of how a company’s IP value can evolve depending upon its objectives. This year, the company stated that it would not sue any parties infringing on its patents based on “good faith,” meaning other automakers and competing EV makers could gain access to the company’s technology. The idea was to expand the market for electric vehicles as a whole, not to take away the value of those patents, and to reinforce Tesla’s role as an industry standard setter, which is more likely to benefit the company’s brand and commercial prospects than its patents would be if they were strictly enforced. This example demonstrates, however, that the benefits of Patent Asset Value are not just exclusively those of being exclusive — they can also be the benefits of using IP to create a market. This is something that is often forgotten when developing Startup IP Strategy around only defending against litigation. This same dichotomy can be seen on a smaller, less widely discussed scale in early stage software startups: A startup makes a provisional patent filing on a feature, but then pivots and no one ever thought to change the first-mover decision, so it continues to pay maintenance and prosecution fees on an asset that doesn’t match the company’s current trajectory. 

What Are the Five Key Startup IP Assets to Prioritize First?

When founders and early hires go through a valuation, the first thing they should consider is that generally, if they’re going to protect anything, it’s best to concentrate on these five categories of startup IP assets, as protecting everything well is often a lost cause. Founders, an operations lead or an outside consultant who may have a few hours to devote to prioritization is often the one to make this list, so having a clear and ordered checklist is very important for early team members who do not have a dedicated IP counsel on staff. The following is the order in which most investors and IP counsel would look at items during early stage planning or diligence preparation.

• Core product patents – These are the patents that are directly connected to the technology used in the product and are likely the most difficult for the competitor to replicate and most impactful for Startup Asset Valuation in deep-tech startups.

• Brand names – The business name, logo, and product-line names should be registered in the beginning, because it can be very expensive and will impede customer confidence if the company changes its name and/or logo or if a product-line is changed later.

• Proprietary algorithms and trade secrets – Any process, formula, or dataset that gives some sort of competitive advantage that is not and should not be patented must receive formal protection of confidentiality – employee agreements and access controls.

• Software and content copyrights – The company is responsible for software and content copyright, not individual contractors, with properly completed assignment agreements.

• Domains and digital assets – Website domains, social media handles, and app store listings should be protected and monitored, as losing control of them can negatively impact years of marketing efforts.

Looking at these 5 categories, in the right order, provides a startup with a realistic, more prioritised answer to what IP assets ahould startups value first? than considering every filing or agreement to be of equal importance. Early-stage teams with limited budgets repeatedly say that this type of triage, done early, will save them money, negotiations power and so forth, especially when outside counsel or acquiring companies begin asking pointed questions about ownership. .

What Benefits and Challenges Come With Valuing Startup IP Assets Early?

By taking a pragmatic approach to startup asset valuation from the outset, startups can generally move more quickly through the fund-raising and acquisition process, as investors and legal teams aren’t necessarily tasked with backfilling minority or prior rounds or tracing down lost assignment agreements under time pressure. This is more important than founders might realize: A due diligence drag that gets stuck on the IP ownership drag can eat weeks of momentum in an active fundraising window, or even kill a deal if the issues seem severe enough to indicate that IP ownership is a general area of sloppiness. A robust startup IP assets inventory also helps to run better licensing negotiations as the buyer or partner can easily find out what and why they should buy it. For young professionals, it helps to understand how these categories work together, as opposed to as an isolated finance concept that you read about in a book. For professionals at the beginning of their career, participating in this sort of IP mapping exercise is a truly transferable skill-set that can be used in a legal, financial, or product role, as startup IP assets affect most of the aspects of a growing company, including hire agreements and marketing materials. The ability to guide a founder through the material, in a structured and easily understood fashion, is just the kind of practical thing that gets noticed early in a career. Table 1 below provides a general summary of the types of IP concerns that typically arise during the early stage startup asset valuation discussions, whether they occur with a venture investor, strategic partner or an acquiring company.

Table 1: Startup IP Assets and Their Role in Startup Asset Valuation

As you can see from the table, patent asset value is more significant at the beginning of the technological company, while trademarks and trade secrets are more significant as the business expands and the brand is becoming known independently.

The difficulties are just as serious. Patent prosecution is costly and time consuming, and many start-up businesses can’t afford to file broadly, forcing them to make difficult decisions – what they want patented first, and what they want patented next. Unlike a patent or trademark, the trade secrets are not publicly recorded and as a result can make an investor uncomfortable during the diligence process until the company can demonstrate that it has clear confidentiality policies in place, with documentation of access to confidential information and how this is protected from disclosure. A second issue relates to the ownership of the startup IP sssets on which the business is founded: founders who have built early prototypes with outside contractors, with no assignment agreements in place, often find out during a funding round that they don’t cleanly own the very IP sssets on which their company is built. One of the best and most practical reasons for having a disciplined Startup IP Strategy from day one and not after a term sheet is signed is that such a scenario is not one in which the ownership rights are renegotiated, which is the last thing the founding team wants. The best prevention for most of these problems, according to legal counsel who specialize in startups, is to have all contractors, advisors and early employees sign an IP assignment agreement before they actually do any work. 

What Lessons Do Real Startup IP Cases Teach About Patent Asset Value?

There is a great lesson to be learned from the 2019 trademark dispute between WeWork and its former parent company, the lesson being related to brand IP. The company’s rebranding of its holding company to “The We Company” involved a nearly six million dollar agreement with an entity owned by one of the company’s co-founders for the “We” trademark, which drew criticism from the public and investors upon its disclosure prior to a company attempt to go public. This episode was used as a textbook case of bad governance in dealing with intellectual property, and is evidence that the value of both patents and trademarks must be assessed independently, particularly when both sides of a transaction are insiders. For the professionals the lesson is that while IP transactions within the Startup may be all about formality, they are also financial transactions and should be treated as such, as doing otherwise can unknowingly put an otherwise sound startup IP strategy at risk.

The lesson for the younger ones is that knowing about IP is a useful and distinguishing competence for legal, financial and operational staff. The typical employer will probably notice an intern or class project that answers the question what IP wssets whould wtartups walue first? — because it reflects real-world judgment, rather than IP as an abstract field of study. This is exactly the ability that makes someone want to hire someone who is interested in Startup IP Assets. By working on these case studies progressively, professionals can be ready to be a valuable asset to a company’s startup IP strategy well before assuming a high-level position or earning a law degree. The best practices of the professionals who come to specialize in this space often stem from asking better questions during a diligence process or during an internship, such as, “Who owns a piece of code?” or “Was a patent search truly performed?” or “Why was a patent filing abandoned mid-prosecution?” and others, which accumulate over the course of one’s career. 

Table 2: Common Challenges in Startup IP Strategy and How to Address Them

Conclusion : What IP Assets Should Startups Value First?

Startups typically don’t have the time or budget to cover everything and so there’s a lot of value in making a determination of what IP assets should startups value first? long before a term sheet, a licensing offer, or an acquisition conversation. Prospective professionals that grasp the function of patent asset value, trademarks and trade secrets in the context of a larger startup asset valuation will have the ability to help founders, investors and legal teams during the fundraising process, licensing and even an exit. The obvious next step is simple: Identify all IP assets that the company owns, rate them on a scale of commercial impact, document ownership clearly and re-rate them as the business grows and new products and markets are introduced. There’s no big legal budget needed to get this process going, and a tabular spreadsheet listing all patents, trademarks, copyrights and trade secrets, as well as who owns them and how they were acquired, is often sufficient to begin the process and to show the most serious deficiencies. When they’re consistently implemented, this means startup IP assets can become a true engine of value, as opposed to a last-minute panic measure, and when they’re implemented, they’re the difference between any last-minute hack job and a smart startup IP strategy designed to help the business for years to come.